May 12 2010
When Spain’s unemployment problem gets ugly
Published by Andrew McCarthy at 11:54 pm under Budget deficit,Business Cycle,Credit crunch,Fiscal Policy,Macroeconomics,National debt,Recession,Supply-side economics,Unemployment
With more than four million Spanish people out of work this week, the eighth largest economy in the world finds itself once more in a perilous position. In the last twelve months the number of unemployed people in Spain has doubled. Spain now has as many unemployed people as France and Italy combined, and the unemployment rate is nearing the historic highs of 1993.
The type of unemployment in an economy can be classified in different ways. The main types are cyclical or demand deficient unemployment but other forms exist such as real-wage unemployment and equilibrium unemployment. Some economists also refer to unemployed people as structural, frictional, seasonally or cyclically unemployed.
From the graph below we can see that unemployment in Spain has been high for at least the last 20 years, compared to other countries within the European Union.
Source: OECD Factbook 2009: Economic, Environmental and Social Statistics
The cause of growing Spanish unemployment in 2008 to 2010 is related to the collapse of the domestic building boom and the wider global recession. In 2006, Spain enjoyed low interest rates and therefore cheap loans, this allowed developers to build new apartment blocks, houses and commercial buildings with a relatively low cost of borrowing. Spanish people could afford mortgages at low interest rates and therefore purchased houses contributing to the building boom. However, when the flow of “cheap money” ran out in mid 2008 the building stopped and the flow on effects of spending dried up. Falling tourism receipts and less foreign investment have also exacerbated the issue leading to unemployment doubling between 2008 – 2010.
We can classify the form of unemployment, illustrated in the Spanish example as demand-deficient unemployment. It is related to a downturn in the economic cycle. This concept is explained below.
Effects and Solutions
The social and economic impacts of 20.7% unemployment are obvious, but the solutions are less so. Climbing unemployment creates two evils; falling tax revenue as workers no longer earn wages and the increased burden of paying benefits to the four million unemployed citizens. In addition, a series of social problems are often intertwined with high unemployment, these include depression; lose of skills, poverty and higher crime rates. Spain therefore has a few problems to solve this summer. Whilst Spanish people may enjoy a summer by the beach, and a glass of sangria, the government will be hitting the books to find a solution to the problem. Here are a few suggests to get the politicians thinking.
- Use fiscal stimulus to boost consumer and government spending, thereby increasing the demand for jobs. Spain could plan for a budget deficit (expansionary fiscal policy) and fund spending increases though increased government borrowing. Spain’s current level of public debt is 67% of GDP, which is well below stricken Greece at 124%. However, Spain now has to borrow money from international bond markets, which are skeptical about Spain’s ability to pay back this debt. This is despite assurances and favourable rates offered from the European Union this week. Increasing government debt in a period of European financial crisis is a risky option.
- Use loose monetary policy (lowering central bank interest rates) to encourage Spanish people to increase their consumer spending through increased borrowing. If you understand the complexities of the European Union, you understand that all 21-member countries use the same currency and follow the lead of one central bank. Despite one country wishing to lower interest rates, other countries may think differently. Europe can be compared to a train rolling along on a set of rails, with 21 separate carriages. Each European country must follow behind the big engine, there is no room to deviate from the central banks interest rates and all of the countries must move together. Many people have wondered how long the European train would run, before one of the carriages derailed.
- Force Spanish firms to employ more people. Firms have no requirement to hire more people. They may choose to employ more people but will logically offer everyone lower wages to maintain profitability.
- Use supply side policies to bring greater efficiencies to firms though increased on the job training and worker education. This is a long-term solution, which will require large structural adjustments, how Spain produces goods and services and exactly what is does produce. A startling statistic is that the average Spanish university graduate will find their first job at the age of 27, long after they have graduated.
Discussion Questions:
- How do economists measure unemployment?
- Explain the causes of increased unemployment in Spain?
- Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
- How could supply side policies be used to reduce the level of unemployment in Spain?
About the author: Andrew is an International School educator based in Singapore, who specialises in teaching Economics and leading change in a 1:1 Apple laptop environment. He enjoys teaching the International Baccalaureate curriculum and has taught the Diploma Economics course to both Higher and Standard Level students. Previously Andrew taught in New Zealand as a Geography and Economics teacher and eLearning coach. He is an adventurous New Zealander, who enjoys running, travelling and spending time with friends and family.
Andrew is currently the head of Educational Technology at the United World College of Southeast Asia. Read more posts by this authorRelated posts:
- The business cycle rears its ugly head!
- Unemployment and inflation: understanding the Fed’s balancing act
- The Federal Reserve and the tradeoff between unemployment and inflation
- Unemployment and Flexicurity in Denmark
- Sample IB Economics Internal Assessment Commentary – Understanding the ECB’s bond-purchasing program
1. How do economists measure unemployment?
Unemployment is measured by doing: TLF (total labour force) – Employed population= Unemployed population.
2. Explain how expansionary fiscal policy could reduce the rate of unemployment?
Expansionary Fiscal policy is basically Government Spending (G). By increasing government spending, it will supposedly boost the Consumer Spending (C) because consumers will start spending money again. Which suggests that firms will get more money and then need to produce more because of the increased demand, and consequently employ more labour in order to produce enough. And the government may pay firms to employ more labour, which will decrease unemployment.
3. What does the concept of the natural rate of unemployment represent?
It represents the percentage of which unemployment will never go bellow. Because there will always be voluntary unemployment in the economy, which is natural. So the % of workers that are voluntary unemployed is the natural rate of unemployment.
4. Evaluate the effectiveness and suitability of supply side policies to reduce unemployment in Spain
The supply side policies aim to increase the potential GDP of the economy by increasing/improving the factors of production. And in this article it is mentioned that the Spanish population has experienced a loss of skills and increased crime rates, because of social factors. So the supply side policies may subsidize on education, which may lower these factors. And these policies will increase the use pf technology in firms, which will improve productivity.
Basically, supply side policies are the most effective type of intervention by the government because the demand side policies aren't possibly applicable in Spain at this time. Because they can't decrease taxation due to their high debt, so they can't use fiscal policies. And they can't lower interest because the central bank that controls the Spanish economy is the same in all Europe, and all countries must consent to the change, which right now, they won't.
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1. Economist measure unemployment as a percentage of how many able workers there are in an economy that do not work… commonly both involuntarily and voluntarily unemployed.
2. Fiscal Policies as a demand side policy will help workers attain jobs in the short run by raising Aggregate Demand in the economy. Lowering taxes and increasing government spending will allow households to have more disposable income and firms to have more cash for workers while still being able to pay for costs of production.
3. and 4. are coming soon.
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1. Economists measure unemployment by calculating the unemployment rate, which is the percentage of the total labor force (total number of people employed or seeking employment in a country) that is unemployed but actively seeking employment and willing to work. This can be calculated with the formula – number of employed people divided by the total labor force.
2. Expansionary fiscal policy can help reduce the rate of unemployment, as increasing its spending with a budget deficit on infrastructure and building constructions will lead to an increase in demand for labor. Furthermore with more people having jobs, there will be more disposable income and so consumer spending will increase. This further leads to an increase in demand for goods and services, thus firms will employ more workers to meet the demand.
3. The concept of the natural rate of unemployment represents the rate of unemployment when the labor market is in equilibrium. Therefore it can also be known as the full employment level of unemployment. This involves the difference between those who would like a job at the current wage rate and those who are willing and able to take a job. Thus the concept includes; structural unemployment, frictional unemployment, and those who are not able to get a job because they don’t have the right skills.
4. Supply side policies are government interventions to improve productivity and efficiency in an economy. In Spain’s case, the lack of aggregate demand is reducing the demand for labor, therefore the country is going through demand deficient unemployment. Thus, demand-side policies are somewhat considered as more efficient. However, because of large debts and the central bank issue, supply side policies could be suitable. For example the development of technology can broaden the range of job opportunities, and so there is a higher chance that university graduates will get a job. Furthermore reducing income taxes for the small number of the employed Spanish population can attempt to increase disposable income and so increase demand for goods and services. Thus by also reducing corporation taxes, there will be an increase in the potential output of the economy, as a result stimulating the circular flow of income. However the results are likely to be more evident in the long term than in the short term.
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1. The unemployment is calculated by unemployment rate. The unemployment is measured by employed people divided by the total labour force (employed + unemployed).
2. The expansionary fiscal policy can help boosting the aggregate demand curve. It will increase the consumer spending, therefore the firms earn more money and the demand for labour will increase to increase the productivity. The economy can grow further by more consumer spending as real wage increases and by multiplier effect.
3. The natural rate of unemployment is the level of voluntary unemployment people. The voluntary unemployment always present in the economy, and the unemployment level will never go below that level, so it is called natural rate of unemployment.
4. The supply side policy is government intervene to increase to aggregate supply of the economy. It is effective to increase the Real output of the country and at the same time, reduce the average price level. However, in Spain's case, Spain is in deep recession. Followed by Neo-classical theory, the supply side policy is always effective even though economy is in recession because the Long Run Aggregate Supply will increase and the equilibrium will always shifts. However, followed by Keynesian theory, if we consider that the Spain is in deep recession, the supply side policy won't be very effective to the economy.
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How do economists measure unemployment?
-By calculating the unemployment rate, which is the percentage of the total labor force (total number of people employed or actively seeking employment in a country). Number of employed / total labor force.
Explain how expansionary fiscal policy could reduce the rate of unemployment?
-Expansionary fiscal policy could reduce the rate of unemployment. If the government increase its spending on infrastructure there will be increase in demand for labour. If more people unemployed, they have more disposable income to spend, which will lead to rise in spending.
What does the concept of the natural rate of unemployment represent?
-The natural rate of unemployment is the level of voluntary unemployment. The unemployment level will never go below that level.
Evaluate the effectiveness and suitability of supply side policies to reduce unemployment in Spain
-As Spain is in recession, the supply side policy is effective rather than demand side policy. LRAS will increase due to supply side policy.
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What happened in 2007? What caused the dramatic increase in the rate of unemployment in Spain?
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The situation of the young people is one of the worst. Young people are the present and the future of Europe and a rich source of dynamism. However, the situation of young people who are studying and entering professional and adult societal life varies within each country, and even more so between countries at European level. The lowest rate of unemployment is in the Netherlands (7,3%), while the highest rate was found in Spain (40,7%). The data about unemployment of young people are concerned -20,6% (15-24 year) in EU-27 and is still increasing!
Because of that the 27 Member States of the European Union adopted a resolution which puts into force a new EU Youth Strategy for 2010 – 2018. The resolution outlines the main goals for a long-term strategy for youth: creating more opportunities for young people in education and the labour market and promoting the active citizenship, social inclusion and solidarity of all young people.
In some research has European Union found out that young people tend to be far more affected by unemployment than their elders, because unemployment rates were usually two to sometimes five times higher among those aged 15–24 than among the population aged 30–54.
In my opinion in the time of crisis the most important thing is how many experiences you have in work, because the employer will rather employee the person with experiences in business or in other fields, as a educated person without any working skills. The young people should start to get their experiences maybe as a part-time work between the study. After this I think there should be no problem to find a job.
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[...] Source: http://welkerswikinomics.com/blog/2010/05/12/when-spain%E2%80%99s-unemployment-problem-gets-ugly/ Filed under Uncategorized ← Organizational Dynamics LikeBe the first to like this post. [...]
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1. The number of people out of work, who are willing and able to work, as a percentage of the total work force.
2. The high unemployment was caused by the collapse of the Spanish building boom, which was further complemented with falling tourism receipt as response from the global recession.
3. In an expansionary fiscal policy the government would increase spending as to combat recession and promote economic growth. With this economic growth the demand for labour would increase and unemployment decrease.
4. Supply side policies could also be used to decrease unemployment. On one hand, reduced trade union power or less or on minimum wages will increase firms' incentives to hire more labour. On the other hand a structural 'makeover' of the spanish economy would provide more of a long-term solution to the problem. Especially frictional unemployment could be attacked here as Spanish university graduates on average get their first job at the age of 27.
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1.How do economists measure unemployment?
Unemployment is usually expressed as a percentage of the total labour force
—- Unemployment Rate = (Unemployed Population / Total Labour Force)*100
However it's easier to measure the Employed Population rather than the Unemployed population
—- Total Labour Force – Employed Population = Unemployed Population
2. Explain the causes of increased unemployment in Spain?
The construction industry has collapsed and as a result, a lot of jobs are no longer available for construction workers. Spain also experienced falling tourism receipts and less foreign investment as a result of the global recession.
3. Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
If the government were to increase it's spending, this could help promote economic growth. One way to do this is to pump money into the building industry once again, improving Spain's infrastructure and along with this, creating more jobs. The demand for labour will grow and the rate of unemployment falls.
4. How could supply side policies be used to reduce the level of unemployment in Spain?
Because of Spain's huge debt and the inflexibility with the interest rates, demand side policies may not be that easy to implement. Supply side policies may be easier to use instead. One Example : Research and development of technology can be promoted; this will create jobs for university graduates.
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1. How do economists measure unemployment?
Unemployment can be calculated as a percentage of the total labour force (TLF):
(Unemployed Population / Total Labour Force)*100 = Unemployment Rate
OR
You could just measure the number of people who are unemployed:
Total Labour Force – Employed Population = Unemployed Population
2. Explain the causes of increased unemployment in Spain?
Spain's economy took a real hit during the world economic crisis in 2008 as such the then booming construction industry collapsed due to this a lot of jobs are no longer available for people in the construction industry such as construction workers etc.
3. Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
If an expansionary fiscal policy were to be implemented in Spain, the Spanish government should increase it's spending to combat recession and encourage economic growth. As a result of this economic growth the demand for labour will increase and as such the rate of unemployment would fall.
4. How could supply side policies be used to reduce the level of unemployment in Spain?
To decrease unemployment Spain could also implement supply side policies by encouraging research and development of technology creating more jobs for skilled workers also as trade union power is reduced minimum wages could be implemented more, this creating more jobs but at a lower pay grade.
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1. Unemployment is a percentage of the total labor force.
2. There is increase unemployment in Spain because of the building boom followed by the global crisis in 2008.
3. Expansionary fiscal policy could reduce the rate of unemployment by the government increasing it's spending which will in turn help the economy grow. With the economy growing, the demand for labor will increase, reducing unemployment.
4. Supply side policies such as research could be implemented to give other people different skills that might allow them to pursue other jobs and in turn, will reduce the total level of unemployment in Spain.
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1.How do economists measure unemployment?
You can get the value of unemployment by calculating the formula of (Number of employed / total labor force).
2.Explain the causes of increased unemployment in Spain?
The reason why Spain faced huge increase in unemployment is due to collapse in the domestic building boom and the wider global recession. The collapse in the domestic building boom caused critical structural unemployment, which is created by either development of technology or demand degree is no longer applicable, therefore, citizens in Spain have ability and willing to work, but unable to work, since jobs that they can applicable is not exist. Moreover, the huge recession in global made firms not to demand labour force.
3.Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
Due to increase in unemployment and huge recession, there will be huge fall in AD, as Consumption spending and Investment are decreased, no more supply of taxation from closure firms and more Transfer payment to those who are lay offed from work. Therefore, as fiscal policy achieve to increase AD by increasing Government spending, and achieve full employment level of output. Moreover, one of the advantage of using Fiscal policy is that it is very efficient to escape from huge depression, which will achieve two negative aspects that Spain has faced.
4.How could supply side policies be used to reduce the level of unemployment in Spain?
Supply Side Policy achieves the economy to increase LRAS, full employment level of output. One of the policy that government use is 'Interventionist Policy', which will let consumers to have higher education, internship and providing more jobs to reduce the level of unemployment.
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1) How do economists measure unemployment?
Unemployment Rate = (Unemployed Population / Total Labour Force) x 100
2) Explain the causes of increased unemployment in Spain?
The collapse of construction works and from the global recession. The Spanish citizens are willing to work, but there isn't enough job for everyone.
3) Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
As the government increases the money they put into the economy, it shifts the AD towards the right, which increases the AD and therefore increase the Real GDP. The consumption spending increases as well as the investment, which is the major component that makes up AD. This increases the employment rate.
4) How could supply side policies be used to reduce the level of unemployment in Spain?
Spain can educate the citizens so they can do jobs which requires specific skills. This will increase the LRAS to it's right and therefore, reduce the level of unemployment in Spain
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1. How do economists measure unemployment?
(total number of employed labor / total Work Force)
2. Explain the causes of increased unemployment in Spain?
THe unemployment in spain is due to economic downturn (recession) and the collapse of the building boom. The collapse of the building boom caused a structural unemployment where there is less demand for the building labor where most of the spian workers used to work. Also the huge recession in 2008 caused a cyclical unemployment where there is less demand of firms for labor.
3. Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
when expansionary fiscal policy is used, government spending is used to increase AD. the consumption and investment will increase due to higher demand. this will achieve a full level of employment again where there is more demand for labor
4. How could supply side policies be used to reduce the level of unemployment in Spain?
the interventionist supply side policy can be used to increase the y potential of the economy. the workers will be trained and apprenticeship will be subsidized. this will reduce unemployment level.
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How do economists measure unemployment?
Economist measure unemployment as a percentage of the people working divided by the total labour force (amount of total people who could work)
(Unemployed Population / Total Labour Force) x 100
Explain the causes of increased unemployment in Spain?
The main cause of the increased unemployment in Spain was due to the crash in the construction industry in 2008, due to the crash in the industry it has made a lot of people unemployed. Furthermore a fall in tourism in Spain has also put many workers out of jobs as the fall in tourism has lead to no demand for their jobs no longer their.
Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
Expansionary fiscal policy would increase AD that would have previously fallen due to the high unemployment levels. Fiscal policy aims to an increase in AD by increasing Government spending, and achieve full employment level of output.
Expansionary Fiscal Policy: G>T (AD?) GDP? Pl? U?
How could supply side policies be used to reduce the level of unemployment in Spain?
The main goal of supply-side policies is to increase the potential output of the economy by increasing the quantity of the factors of production and/or improving the quality of the factors of production.
Supply side policies aim to shift the LRAS and increase potential GDP and the full employment level of output.
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1. How do economists measure unemployment?
(total number of employed labor / total Work Force)
2. Explain the causes of increased unemployment in Spain?
the increased unemployment is caused by two reasons, one is the global recession. the other is the fact that the construction industry's boom collapsed and left most people structurally out of jobs.
3. Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
the expansionary fiscal policy will be able to reduce the rate of unemployment by increasing the aggregate demand, therefore the businesses will have to hire more- increase the production in relation to the demand.
4. How could supply side policies be used to reduce the level of unemployment in Spain?
as a part of supply side, the re-education program will help by teaching the workers to do other jobs and find new jobs so there will be more AD yay.!!!
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1. the economist measure by number of employed divided by total labor force.
2. it is caused by the collapse of the Spanish building boom and also due to the global recession in Spain. There are people who want to work but there are shortage in job for everyone to work.
3. by using expansionary fiscal policy could reduce the unemployment rate, there are increase in government spending and this will lead to occur economic growth. thus, the aggregate demand will shift back and decrease in unemployment rate.
4. they can educate the people to improve and to get better skills. they could also do research and technology improvement. from there, they can get to work even though at the lower wage rate.
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How do economists measure unemployment?
the unemployment rate calculate the percentage of the total labour force (TLF):
(Unemployed Population / Total Labour Force) X 100
Explain the causes of increased unemployment in Spain?
huge recession in global made firms not to demand labour force which means there have a structural unemployment. therefore there have workers who willing to work but ther is no enough jobs because of recession in global.
Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
by expansionary fiscal policy which is incerase government spending. it shifts AS to right whcih increase the AD. therefore there is incerase in Real GDP. by shift AD, it means there increasing consumer speding and it will decrease the employment rate.
How could supply side policies be used to reduce the level of unemployment in Spain?
according the supply side policies, such as educate the citizens to get better skills it can shifts the LRAS to right. there fore it reduce the unemployment rate of Spain
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1. How do economists measure unemployment?
Unemployment Rate = (Unemployed Workers / Total Labor Force) * 100
2. Explain the causes of increased unemployment in Spain?
The economic recession in 2008. There is also a big number of workers willing to work but there are no jobs available to meet the demand.
3. Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?
Expansionary fiscal policy increases aggregate demand by increasing government spending and taxes. The government could provide subsidy for education and firms so that they woudl be able to lower the cost of production and hire more people to work for them reducing unemplloyment.
4. How could supply side policies be used to reduce the level of unemployment in Spain?
Supply side policies increases the potential output of the economy by increasing the quantity and quality of the factors of production.
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[...] – When Spain’s unemployment problem gets ugly – Economics in Plain [...]
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Looking for a place for my students to post their findings and thoughts on the current credit/banking situation in Wenzhou China, I am inviting them to leave comments here, since this is the most recent blog posting in the "credit cruch" category.
I don't want them to have to answer a set of questions, per se, but rather to discuss in a more free-form way the issues raised by what they read from various media sources, as well as the issues raised by each other in their postings here. I hope the postings would begin with a description of what is happening, then move to what various people's motives and decisions have been, what incentives have been created, how other people are responding to those incentives, and (large question) what roles do financial institutions and credit markets play in the functioning of a modern economy. Again, this list is not meant to be a checklist of questions for each student to check off while dutifully answering each one, but rather a general (and vague) guide for what I am looking for on this topic.
Discuss, respond to each other's postings, and dig into the topic to gain understanding.
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The situation in Spain makes me recall the similar event in Wenzhou, China. We know that Spanish borrowed many loan to invest because the interest rate was very low. When the “cheap money” ran out, they had to stop the activities which cause the unemployment problem. In China that’s the similar case in Wenzhou. The factories, companies in Wenzhou collapsed because of borrow too much money and they can earn enough profit to pay for the loan finally they didn’t have enough money to maintain their business. However; there were some difference between China and Spain. Businessmen borrowed too much loan because of their expectation and Development bottleneck. Since the return in Chinese market is really high which increases people’s demand for business and investment. So people go to bank and usury to borrow loan(Which interest rate may not low ).but they borrowed too much loan which they weren’t able to undertake it.This caused Capital chain rupture and the factory collapsed. Also, When the plant or the development of the company to a certain period, will meet development bottleneck, if the factory or company use fund undeserved can cause capital chain rupture and failed. In addition, government policy is one of the main reason of this event.These is the reason of capital chain rupture in Wenzhou, as the result of this ,many bosses in Wenzhou Suicide or run road.Now,Wenzhou government set up a fund to help Wenzhou small and medium-sized enterprise through this difficult period. I think this event can appease Wenzhou people’s excessive enthusiasm.PS:is that possible for Spanish government to set up a low interest rate for foreign country to invest in Spain which I think may alleviate the problem.
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I have no idea what’s happened in Wenzhou, but after I go through the news, I fond out that what happened in Wenzhou is about the borrowed funds.
The simple statement that are relative to this situation is that the interest rate rations the available supply of loanable funds to investment projects that have expected rates of return at or above the interest rate cost of the borrowed fund. Wenzhou is famous for its private enterprise. The economic crisis in Wenzhou is happed given that the Chinese market is not standard and prefect, this is only a few ways for private capital investment, and the rate of return is low while the rich is high. Wenzhou is a city that has a large number of private funds; the sad truth is that they don’t have a reasonable guide to give an idea to them how to use the money. Almost 20 years, they use their private funds in making economy bubble to obtain great income. Therefore, usury is the major choice of private funds. But when the usurious interest is larger that the expected rate, the bursting of the economy bubbles is inevitable. As a result of this, many store-keeper chose to leave the company without paying back the usury.
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The entrepreneurs in Wenzhou, currently, have serious trouble with the debt they owed the lender. The reason for that problem is that the bosses in Wenzhou, in order to gain a great amount of finance to invest, loan usury from the others. After more and more bosses borrow huge number of money, in an unstable economic situation in Wenzhou recently, the chain of finance had broken, which resulted in that the lender cannot get their money back and borrowers also are unable to return the money and huge interests. This kind of result will also be a reason to exacerbate the issue, which could be described as a vicious cycle.
According to the breakthrough news, an awful number of Wenzhou bosses committed suicide, or ran away from China to prevent themselves from the trace of the lenders and the police.
It’s noticeable that the interest of the loan is high, so high that the borrowers must pay 6 percent per month as interest. Even one corporation, owned by Hu Fulin, has to pay 20 million as interest per month!
To connect this event to our courses, when the bosses in Wenzhou started to borrow huge number of money from others, the demand curve of loanable funds shifted to the right, so the interest of the funds also increase. As a result, more and more usury appeared underground, and the total chain of the finance became unstable.
In modern market, the financial and credit institutions provide a crucial role in the economic world as a tool for financial flowing. The entrepreneurs can accumulate a significant amount of money to invest in their capital and industries by borrowing money from the financial and credit institutions.
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Personally I consider the situation in Wenzhou, China is a reverse type of that in Spian but both ultimately result in widespread financial crisis.
Wenzhou, famous for its small elegant products, is a microfilm of China's uprising private financial market and a conglomeration of China's private financial capital. The privatly massive money supply once paced a smooth road for Wenzhou's development and paivate manufacturing companys‘ flourish. Since private creditors provide enormous short term predatory loan with low or even no warrant from debters. The only proof debters (namely small or middle scale companies) could provide is companies' positive protential to earn more money and to pay back debt. Private companies seek predatory loan because legal loans provided by grant banks are decreasing and grant banks favor big-scale state owned companies due to their support of government. Besides, the loanable funds are decreasing mainly because of, first, decline of saving which resulted from more consumption and inflation rate, second, monetary policies enforced by China Central Bank to increase banking reserve.
Since private small and middle scale companies continually face money shortage, which means lack of legal and long term relatively low-interest-rate huge loans.
Now, it's possible to draw a financial chain of Wenzhou's private companies, that on the one hand they borrow legally low-interest-rate loans which are not easy to get, on the other hand, on intermissions between pervious loan already being paid and next loan to be get, they seek short run predatory loans.
It's obvious that once a link on the chain were to collapse, the whole chain would tear down.
Therefore this is how Wenzhou's catastrophe happen:
Government enforces two ways to regulate the market, one of which is a political policy to raise interest rate floor (China do this because she want to shift current economy structure to a more technology oriented with fewer factories and more laboratories), the other one is monetary policy that previous described. As you know majority companies in Wenzhou are production oriented ones, they would definitely face acute financial shortage that they could neither borrow money from banks legally to invest more on capital stock nor pay back short term predatory loans.
Bankruptcies are their fate. However influence reaches far beyond these. Private (or popular) money reserves who run predatory loans and underground banks, or illicit banks would gradually vanish. Further, more plant, money and labor are yielded to more productive and rising industries such as film making, design etc. (Sounds like a creative destruction, isn't it?) But also caused prevalent economic panic.
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1. Economists will use unemployment rate to measure unemployment. Besides, they have to measure the labor force and then they can know how many people have unemployed.
2. There are reasons. First, is the demand of jobs decreases. Many people have skills but there are not enough jobs for them. Besides, the structural unemployment is a significant reason because it's diffcult to solve and it can make a large number of people unemployment.
3. The policy can increase the aggregate demand so many firms have to hire more people to increase the productivity.
4. The supple-side policies can increase people's skill and it can train workers so they will have more chances to be hired.
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I just went over the Wenzhou Lending Crisis Event as soon as I had finished this article, and I guess the Spain Unemployment event is a different result from the Wenzhou event with the same cause. I also think the Spain event is former step of the Wenzhou event.
In Wenzhou, the banks were not willing to lend the fund to the middle or small scale of firms, so these firms could only borrow funds from nongovernmental lenders. These ways of loan were unsafe, once the link of this loan was broken, it will hurt everyone. However, most of the middle or small scale of firms in Wenzhou was stepping in this way. After a tragedy happen just like in Spain, many of these firms’ owner escaped in order to get rid of the large amount of debts they ever borrowed. So nobody is going to repay these debts, which finally cause the lending crisis. There is a question, why Wenzhou get into such a big problem while Spain was only suffering the unemployment.In my opinion, I think this is something link to the Chinese policy. In China, no govermental bank is taking care about the middle and small scale of firms, which didn't happen in the western contry, so it finally cause this different.
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October 2011 is a hard time for the minor enterprises in Wenzhou, China. What had happened was that many of the minor enterprises went bankrupt. There is a long story to tell about why this had happened. Some people though it was because of the underground usury transaction. But there were some omens before everything has exploded.
In Chinese history, Wenzhou’s management, which most companies in there were minor enterprises, was a role of other places in mainland. Whenzhou’s people were though to be the real example of hard-working and hardship-enduring. However, because of people in Wenzhou became richer and richer, they began to use money in other ways than doing businesses.
Here I must mention some old news about Wenzhou. Earlier in this year, if I do remember the time correctly, Wenzhou’s people got interested in “Chao” (this is a Chinese word of which real meaning is “fry”. In here it means buy something more than needed to increase its price so that the buyers can earn profit by selling it again). They bought houses, virtues, and even a whole building as much as they could for hoping to earn large payback.
But how could they get so much many to purchase such things? The answer is “loans”.
Bosses in Wenzhou’s minor enterprises loaned money to purchase houses and building. As the loanable funds they could get from banks were not enough, they turned to underground usury transaction.
Everything seems fine at the beginning, and then they were hoisted by their own petard. Because their huge purchased in houses and such goods, there came the inflation. Increasing inflation forced government to follow a tight money policy which decreased the loanable funds for minor enterprises from banks. These chain reaction finally forced bosses in Wenzhou’s minor enterprises to borrow more money from the underground usury business. And just as what they did in real estate, this increasing demand made the interest rate higher and higher and higher. Ultimately, they were bankrupted.
In my opinion, banks’ unwillingness to loan money to minor enterprises is the most important reason why such thing happened. This problem (minor enterprises hard to get money from banks) is lasting for a long time and although government tries again and again to improve it, it just could not work. I think the main cause of this situation is that most banks in our country are large banks which prefer loan to large business to small business as minor enterprises.
So except the internal factor cause by Wenzhou’s bosses’ greed, there has more important factor which cause by the disadvantage of Chinese government’s system.
Chinese government does not have enough power to control financial institutions and its economics. Such shortcomings are not only shown in this news but also in others.
As we all know that China is developing in a very fast way, Chinese government is facing more and more challenges. And the highly-control way which our government is used to use begins to be questioned.
Wenzhou’ even is just a beginning, there will be more such evens in the way of China’s developing.
[References: news.baidu.com; NanfangPeople (a Chinese magazine)]
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What happened in Wenzhou lately is that there had been a crisis in the loanable funds market. For enterprises and companies it is harder for them to get a large sum of loan from the bank and at the same time there is inflation in the country, so the price of the capitalized cost of production increases. With this kind of situation, the companies still uses any way they can think of to increase the size of their business which are not that rational because it set foot on varies areas that they are not familiar with. With borrowing large amounts of money from the bank and not able to make enough profit to pay back for them, the phenomenon of capital chain rupture happens are commonly seen in the companies.
Capital chain is a cycle of capital flows, the enterprise, is from the financing (capital inflow) to the investment use (such as purchase of materials, expenses incurred, etc.) If the funds have been used, but not before the next demand for investment funds to cash flows or new, then there may be capital chain rupture, which pose a risk to the enterprise.
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After deliberation, I think the widespeard economics crisis in the Wenzhou, China and Spain are cause by different reasons.Spain bussiness man has benefit with a relatively low cost of borrowing and local households can enjoy a low interest rate so that they can consume a lot of goods or services.However, this"cheap money" is not ever-lasting and soon become run out of. also fewer tourism receipts and less foreign investment are another key determinant to exacerbated Spain economics.
On the other hand, Wenzhou has an excellent reoutation of massive amount of private enterprise. And there are more and more private lending company which has no assurance for legality and safety has established in Wenzhou. And it is difficult for large scale company to lend gigantic amount of money from bank at the same time. So these private lending company is benefit from lending money with a extreme high price. For instance, at first borrower need to pay lending company 0.1% interest rate per day, now it is booming to 2% per day or even higher. Consequently, company can't promise they can earn enough profits to pay the lending money back. That's why there are lots of people bankrupt at this time of period. Also the government has uncontrol on the loanable fund market is also contribute to this effective crisis.
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